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Should You Buy Actavis?

Victor Selva

Victor Selva

9 followers

Dublin, Ireland-based Actavis Plc (ACT) is a pharmaceutical company engaged in the development, manufacturing, marketing, sale and distribution of generic and brand pharmaceutical products. The company operates in three segments: Actavis Pharma, which its U.S. portfolio consist of approx. 250 generic pharmaceutical product families; Actavis Specialty Brands, which has portfolio of over 40 brand pharmaceutical products and Anda Distribution, which distributes generic and selected brand pharmaceutical products, vaccines, injectables and over-the-counter medicines.

Product Portfolio

The company markets over 40 branded specialty pharmaceuticals, principally in the U.S. and Canada that are focused mainly in the urology and women's health therapeutic categories, including Androderm, Kadian, Crinone, and Generess among others. Moreover, new products like Rapaflo (a treatment for enlarged prostates), Gelniqueoxytrol gel
(to treat urinary incontinence) and Trelstar (a treatment for prostate cancer), should help boost revenues.

Expansion Strategy

The company has basically three strategies consisting of (1) internal development (2) the establishment of strategic alliances and (3) the acquisition of products or companies that complement the company's present businesses. Past acquisitions included Andrx Corp. in 2006, and UK-based Arrow Group in 2009. Other acquisitions were Specifar, Actavis Group and Warner Chilcott in the past few quarters.

The Arrow acquisition will complement its existing brands and help expand in countries like Australia, New Zealand, Brazil, Scandinavia, Germany, Central and Eastern Europe, Turkey, Japan and South Africa. The Warner Chilcott acquisition results in the creation of a pharmaceutical company with combined annual revenues of $11 billion.

Analyst Recommendation

The firm is currently Zacks Rank # 2 Buy, and it also has a longer-term recommendation of “OutPerform.” For investors looking for a Zacks Rank # 1 – Strong Buy, Dr. Reddy's Laboratories Ltd. (RDY) or Mallinckrodt Plc (MNK) could be the options.

Relative Valuation

In terms of valuation, the stock sells at a trailing price-to-book ratio of 4.4x indicates a premium versus the industry average of 3.02x and the price-to-sales ratio of 3.6x is above the industry average of 3.02x.

Earnings per share (EPS) deeply decreased in a substantial way in the most recent quarter compared to the same quarter a year ago (from $0.21 to -$0.86). In the next graph we can see that it has demonstrated a negative trend in the last years. We include the stock price because EPS often lead the stock price movement.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company. Let´s compare the current ratio with competitors in the next table:

Ticker

Company Name

ROE (%)

RDY

Dr. Reddy's Laboratories

22.96

MNK

Mallinckrodt

4.68

MYL

Mylan Inc.

21.2

TEVA

TEVA Pharmaceutical Industries Limited

5.62

ACT

ActavisPlc

-7.87

As we can see, the firm ratio is negative which means that its shareholders are
losing, rather than gaining value. Higher ROE can be found in Mallinckrodt, Mylan Inc. (MYL) or TEVA Pharmaceutical Industries Limited (TEVA). For those investors looking for a high ratio, Dr. Reddy´s Laboratories is the option.

Final Comment

As outlined in this article, Actavis went through a series of acquisitions in an effort to expand its presence and has the most diversified product portfolios in the industry. Although we have seen several weaknesses, I believe it’s a good bet for a long-term investor.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Gurus like Jim Simons (Trades, Portfolio), George Soros (Trades, Portfolio), John Griffin (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) and Private Capital (Trades, Portfolio) have bought it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 5.0/5 (3 votes)

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